S&P downplays regulation impact on Chorus credit rating

Dec. 4 (BusinessDesk) - Standard
& Poor's has downplayed the threat of looming price
regulation to access Chorus's switchgear on its ageing
copper lines, saying the final ruling will probably be
amended given the highly political nature of the fibre
network.

The regulator yesterday released a draft
determination that would cut what Chorus can charge internet
service providers for accessing its unbundled copper network
without having to build their own electronics and software
to $8.93 per line a month from December 2014 from
$21.46.

Chorus has said this will slash as much as 40
percent, or $160 million a year, from pretax earnings while
changes to wholesale pricing for UCLL would have a $20
million earnings impact.

S&P credit analysts Paul Draffin
and Anthony Flintoff said the draft pricing decision was
based on a very narrow benchmark and will probably be
challenged. They said the government's plans to build a
national fibre network will also play into the final ruling,
with politicians likely to influence it.

"Accordingly, in
our view, it is likely that the draft UBA decision will be
subject to amendment before it becomes final," the report
said.

Chorus has "significant capacity" to accommodate
regulated price cuts for its services to keep its investment
grade BBB credit rating, and expects the company's funds to
debt will be well within the rating agency's tolerance.

Rival rating agency Moody's Investors Service put
Chorus's rating on notice over the draft decision, saying it
would "exacerbate Chorus’s negative free cashflow position
and lead to materially elevated leverage, putting
significant pressure on the company’s key financial
metrics."

If Chorus’s credit rating falls below
investment grade while debt is still owed Crown Fibre
Holdings for the government-sponsored fibre network build,
the network company is banned from paying dividends without
CFH’s approval.

Prime Minister John Key described the
move as “very problematic” and Communications Minister
Amy Adams has referred it to her officials to assess the
pricing impact, saying a pricing methodology appropriate to
New Zealand had to be found.

Among Chorus’s concerns is
the potential for much lower copper network pricing to deter
investment and uptake of ultra-fast broadband, using the
government-subsidised fibre network being laid throughout
the country.

Chorus was spun-out from Telecom as a
separately-listed company last year to free up the
telecommunications company from its regulatory burden and
allow the network operator to successfully win a billion
dollar subsidy to build a nationwide fibre network and rural
broadband system.

Some 80 percent of the network
company’s revenue is still derived from the ageing copper
network, and is subject to the Commerce Commission’s
pricing review.

At a media briefing in Wellington,
Telecommunications Commissioner Stephen Gale yesterday
stressed the UBA pricing regime was a draft decision and
would go out to industry for consultation with a view to
making a final ruling in June.

The UCLL service lets
telecommunication companies use the copper network between
an exchange and an end-user’s premises to offer their own
voice and broadband services. UBA gives access to Chorus’s
electronics, software and transport over the network,
meaning telcos don’t have to build their
own.

The Wellington-based BusinessDesk team led by former Bloomberg Asian top editor Jonathan Underhill and Qantas Award-winning journalist and commentator Pattrick Smellie provides a daily news feed for a serious business audience.

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